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Quelle Surprise! Banks Lied About Bailout Funds and Got $13 Billion in Profit from Them

Bloomberg News is continuing with the tankless task of pushing forward with FOIA requests relative to the Fed’s lending programs, and once it eventually gets its troves of documents, having to slog through them to see what they reveal.

Bloomberg has a long article up on its site about its latest findings. And the bottom line is everybody close to the process lied like crazy. For instance:

Banks lied during the crisis. The big banks said they were in really good shape even as they were sucking tons of credit from the Fed. The ones that arguably were healthier, like JP Morgan, tried the “they threw me in the br’er patch, I really didn’t want all that money,” in fact stayed in the program well beyond the acute phase of the crisis because it liked getting all that cheap funding.

Now this sort of misrepresentation is a securities law violation, but since the regulators presumably winked and nodded and it would be hard to prove damages, no bank executive will be held to account.

Bloomberg also performs the useful task of trying to ascertain how much benefit the banks derived from the cheap funding. They come up with $13 billion, or roughly 23% of profit (they assume typical margins, when it would take a good deal of internal data to make more refined estimates). This is actually a very narrow definition of profit impact. The Fed stepping into the markets to shore up the banks by design stabilized and boosted asset prices, which surely had a significant profit impact.

Regulators lied to Congress. The article does a good job of marshaling details:

Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”….

Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.

“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.

“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”…

Lawmakers knew none of this.

They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible…

Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.

Regulators continue to lie. I get really offended by the bogus accounting, such as the “banks paid back the TARP” or “the Fed lost no money on its lending facilities,” which this story annoyingly has to repeat out of adherence to journalistic convention. This is all three card Monte. So what if the banks paid back loans when the central bank has goosed asset prices vis super low interest rates? That’s a massive tax on savers. And we have the hidden subsidy of underpriced bank rescue insurance. Ed Kane estimates that’s worth $300 billion a year for US banks; Andrew Haldane of the Bank of England has pencilled the annual cost as exceeding the market cap of big banks (and that was in 2010, when their stock prices were higher than now).

The Fed is most assuredly going to have losses. It hoovered up a ton of Treasuries and MBS to shore up asset prices at time when interest rates were already low. The central bank intends to sell them when interest rates rise, to soak up liquidity. Buying when interest rates are low and selling when rates are high guarantees losses. As an old Wall Street saying goes, it’s easy to manipulate markets, but hard to make money from it.

The story contains other juicy tidbits, like bank lobbying on behalf of big banks to help them get bigger, and how Geithner told Congressmen they were too stupid to be able to shrink banks, and they should leave those questions to the Basel Committee (which has no interest in making big banks smaller). Go read it here.

Email This Post Email This Post Posted by Yves Smith at 4:15 am



7 Responses

  1. How Paulson Gave Hedge Funds Advance Word


    So what did all those heggies do after hearing non-public information? And who is going to check?

  2. Further proof that we need a step by step dismantling of the TBTF banks, and to once and for all future history, end the existence of the Federal Reserve. The central banks days are numbered, now that we are privy to their manipulation and fraud. Financial crime is just the tip of the iceberg. The money tentacles don’t just feed the european branches; they participate in genocide, the overthrow of foreign law and order through the outright murder or removal of political leaders who reject their corporate rape of their citzenry, propagandize events in their wholly owned media outlets to reflect the exact opposite of what really occured, and pit parties and factions against one another. The power behind the central banks is a formidable foe, but not an undefeatable one. We don’t need any of these banks, and frankly I doubt there is a need for even small community banks. There are so many of us, and so few of them. We have all the power in our numbers and we will prevail over them. We will return to constitutional values and enjoy great freedom, prosperity and peace once we rid the world of those madmen behind the financial crimes. As citizens we can take matters into our own hands and put these deranged anarchists in jail for the rest of their lives for crimes against humanity, and treason. We may have to, since our justice system has been infiltrated and badly corrupted, by those with their hidden agenda to destroy America’s people, property and sovereignty. American spirit is strong, and it grows stronger in the face of a challenge. Work toward this goal by enlightening everyone with an open ear, because we must crush the evil as a unified and unstopable force. The future is ours, and now is the time to act. Spread the Truth, starting with your congressman.

  3. Yeah they paid it back after the FED doubled the money supply How many times?!?

    And How is that Extra Money pumped into circulation?!?



    (NOTE Steve Nagy left those companys in Dec. of 2007–information obtained from discovery in the DE bankruptcy case for New Century)


  5. Really? The banks lied to us once again? Imagine that! It will continue until they are put out of business for good.No amount of talking is going to do any good until this happens.It’s time to take our lives,our finances and our country back.

  6. With all that truth we’re getting after the fact, we’re gona get sooooooo free!!!!!! Can’t wait to taste it!

  7. The banks lied, well now that is a revelation!

    Sure, they filtered the excess monies off the balance sheets and left accounts receivable on the books, compiled the defaults…then you have a negative balance, while the excess cash is moved, probably to an off shore account. Filed an insurance claim, which is not a “profit” in accounting, fraudulently collected on the default and Poor banks now need a bailout. My scenario may not be exact, but surely goes something like that and billions rolling in, never had to account for it, while the taxpayers hand over, with little or no strings, 11 TRILLION to these guys who were made whole by various other means. We can thanks the current administration for this one!

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